In our last HBS post we gave some advice on how to successfully solicit friends and family to become financial supporters for your business. While friends and family investors have been around for as long as entrepreneurs have been starting businesses, the rise of social media and the online economy has given rise to a thoroughly modern new way to raise capital—crowdfunding.
Crowdfunding allows entrepreneurs with a business proposal to pitch their ideas to anyone who has an internet connection and to receive contributions from anyone that wants to support their idea. Rather than providing you with a loan or buying an ownership stake in your business, crowdfunders simply pledge a specific dollar amount that they’re wiling to give to help you realize your dream, typically in exchange for a reward that demonstrates your appreciation for their contribution.
If this all sounds a bit farfetched, a quick look at the two leading crowdfunding sites, Kickstarter and IndieGoGo, reveals a host of entrepreneurial success stories, from the $1.5 million raised to design a better iPhone dock, to more modest victories like the $47,000 for a custom-fit jeans business, and the $6,000 to open a new hair salon.
In exchange for providing entrepreneurs with a platform to raise money, crowdfunding sites keep a small percentage (typically between five and ten percent) of the money raised. Kickstarter is focused on creative projects while IndieGoGo accepts a wider array of fundraising campaigns. Both sites have some specific rules about what type of projects they allow, so read up on their guidelines to figure out which one is better-suited to you. There are also a few smaller crowdfunding sites targeting the entrepreneurial community that may be worth checking out, including MicroVentures, Peerbackers, and ProFounder.
If you decide to go the crowdfunding route you’ll probably still get a large percentage of your money from friends and family. But you’ll also open yourself up to a much bigger pool including friends of friends, current customers and business associates, and if you’re lucky and your campaign goes viral, total strangers.
In order to launch a successful campaign try following these four steps.
1.) Make it Personal – Because you’re presenting yourself as an independent entrepreneur and appealing to individual donors, you’re going to need to make a personal connection. So shoot from the heart, tell people not only what you are doing, but why, and why it matters. Making a short video is an important part of most crowdfunding campaigns and this will be your best opportunity to tell your story in a compelling way.
2.) Offer good rewards – This doesn’t mean rewards that are worth a lot of money. In fact, you may want to avoid high-value rewards as they could trigger unintended tax consequences for your backers. Instead, focus on rewards that demonstrate a personal touch and, if possible, that can help you build your customer base. For example, if you reward backers with a prototype of a new product you’re designing, you may develop some loyal long-term customers.
3.) Keep it realistic and focused – This means choosing a reasonable funding goal and an appropriate length of time for your campaign. (Most sites require that you pick a funding target, and if you don’t meet the target then your campaign is either canceled or subject to higher fees). While there is no magic formula, the average project raises less than $10,000 and is live for about two months. Consider the size of your network and their financial position when setting your target, and stay engaged with them throughout the length of your appeal.
4.) Spread the word – Friends and family will almost certainly be your first donors so get the word out to them right away, and then encourage them to share with their networks. You’ll also want to integrate your campaign onto any social media sites and blogs that you maintain.
If you end up successfully raising money through this exciting new vehicle, make sure to consult a tax professional to see what you need to do to properly account for your contributions.